UNDERSTANDING THE POLITICAL WORLD POLITICAL ECONOMICS Dr. Jose A. Lopez Assistant Professor of Agribusiness Advisor for the Sophomore Year Experience Sponsored by Residential Living and Learning Texas A&M University - Commerce November 18, 2015 1 Outline • Ideal-Type Political Economies • The Mixed Economy • Actual Political Economies • Political Economy and Politics 2 Two Ideal-Type Political Economies • An ideal-type economy is what a certain economy might be like in its pure form. • An ideal-type economy is illustrative but it does not necessarily correspond to any real-world example. • The two ideal-type political economies are: – The market economy (also called price system) – The command economy (also called command system). 3 Fundamental Questions To distinguish between the market economy and the command economy, five fundamental questions will be examined: 1. Who controls the factors of production? 2. Who determines what goods are produced? 3. Who establishes the price of the different resources and goods? 4. Who decides how resources and goods are distributed? 5. What is the role of the state? 4 The Market Economy (Private Control) • Factors of Production – Labor: The worker decides who he/she will offer his/her work and the compensation he/she will receive – Land and Capital: The owner decides the conditions the resource will be employed • Goods Produced – Profit maximizing behavior of the firm determines what resources to acquire and what goods to produce – Adam Smith’s (1723-1790) “invisible hand” • Production is guided by the “invisible hand” – In terms of demand and supply, this system is demand- oriented • The firm attempts to assess the demand for various goods in the market and then transforms the factors of production into goods that will maximize profits 5 The Market Economy (Cont.) • Price of Resources and Goods – The market forces of demand and supply guided by the “invisible hand” – Nothing has value except to the extent that someone will exchange resources for it – In most circumstances, many producers offer similar resources and goods that result in vigorous competition – A basic economic assumption in a market economy is the continuous adjustment towards an equilibrium point • Quantity demanded = Quantity supplied • Distribution of recourses and goods – The invisible hand of the market – Market participants pursue their own self-interest 6 The Market Economy (Cont.) • Government Role – Government intervention is minimal – Prevent market participants from doing violence to each other – Protect its citizens from the external environment – Preventing violation of its sovereignty or its citizens’ rights by the external environment – In meeting these responsibilities the government may participate in the market, decrease or increase taxes, implement trade incentives or restrictions, etc. 7 The Command Economy (Government Control) • Factors of Production – In a pure command economy, the government controls/determines how the factors of production will be utilized – The government owns the land, the natural resources, the factories, the machines, and so on. – The government also controls labor • It decides the conditions and purposes for which individual will offer his/her labor • Goods Produced – The government is in a sense the one firm that produces all major goods in the system – The government prepares an economic plan that specifies what, how, and how much will be produced – In terms of demand and supply, this system is supply-oriented • The government attempts to make the best use of the resources and transform them into as many appropriate goods available for the consumers 8 The Command Economy (Cont.) • Price of Resources and Goods – Since the government controls all factors of production (Monopsony) and is the firm producing all goods (Monopoly), it is able to set the prices – The government tells farmers how much to produce and also sets the price – The government will determine who will produce and the wages and benefits they will receive • Distribution of Resources and Goods – The government’s economic plan determines who will receive which goods and how much – For example, farmer X will receive 30,000 corn seeds per acre – Fore example, 1 pound of rice per family per week in city X – Command economies aim to distributing necessary goods (especially food, shelter, education, health care) to every person on an equal basis – However, the crucial decisions about the distribution of goods are made by those with power in the political system 9 The Command Economy (Cont.) • Government Role – Dominant and overwhelming role – Controls, plans, set prices, and distribute all resources and goods – Any surplus belongs to the state and will be used to serve the objectives of the state 10 Benefits and Problems of Market and Command Economies Benefits Problems Market Economy • Decentralized • Market-driven decisions • Economic cycles (boom and bust, (no central plan) inflation and deflation, and growth and recession) • Demand Oriented • Goods’ quality and prices • Goods are reflective of reflect consumers’ desires consumers’ desires may make inappropriate use of societal resources • Competition • Energetic and efficient • Inequalities in wealth and resources Command Economy • Centralized • State plans use of societal • Overcentralized control; limited (central plan) resources innovation; lack of change • Supply Oriented • Production and distribution • Surpluses and shortages; lack of of social and individual needs coordination • No Competition • Work for common good; • Little initiative; shoddy products; relative equality of wealth low productivity and income Critics Market Economies Command Economies Resource Inequality Limited Incentives for Efficiency • Rich gets richer • No initiative to produce high quality • Those with few resources tend to lose goods market power • Poor quality goods • Some people may lack resources to • Access to existing goods meet the standards of living • No incentive for hard work • Inequalities of wealth, power, and • Workers becomes conservative and lazy status Unresponsive Production • Conflict between rich and poor • Production of good that are not directly Production for Profit reflective of consumer demand • Proliferation of goods that are • Central planners decide what people profitable and scarcity of goods that are will have not profitable • Severe shortages of some goods • Wasteful competition among firms if consumers are uneducated Overcentralization and Inflexibility • Central planners usually do not receive Economic Cycles and react effectively to information • Economy experiences cycles (scarcity regarding miscalculations and mistakes and inflation, surpluses and deflation, in the development or implementation boom and growth, recession or of the state plan depression) Outline • Ideal-Type Political Economies • The Mixed Economy • Actual Political Economies • Political Economy and Politics 13 The Mixed Economy • The mixed economy can be understood as an attempt to combine the strengths of the market and command economies, while minimizing the shortcomings of each. • The government owns or directly controls some of the major factors of production, such as those relating to key commodities (e.g., coal, oil, steel), and to key infrastructure systems (e.g., transportation, telecommunications), and to key financial resources (e.g., the banks). • Most public firms are under direct control of the government but usually interact and even compete with private firms. • Price of resources and goods is established in a manner that is more akin to the market system but there is government intervention to insure national priorities – Set the price of certain factor of production, including wages; set guidelines for market prices of goods; regulate competition among firms; etc. • The great challenges for the mixed economy concern the difficulties of striking a proper balance between competition and control, between free market and a planned economy, between private profit and a sharing of society’s resources. 14 Outline • Ideal-Type Political Economies • The Mixed Economy • Actual Political Economies • Political Economy and Politics 15 Actual Political Economies • The contemporary world does not correspond to any ideal- type political economy. • In a sense, all political economies are mixed. • Countries can be classified on a continuum from one ideal type (pure market economy) to the other ideal type (pure command economy). • In politics, a different set of labels is often attached to political economies. • Much of the discussion describes political economies in terms of three “isms”: capitalism, socialism, and communism. • A system near the command end of the continuum is associated with communism while a system with increasing dominance of the private market is associated with capitalism. 16 Actual Political Economies (Cont.) • How do we determine when an actual state changes from one “ism” to another? – There are no precise operational measures that serve that purpose. • What is the domain of socialism? – Socialism is sometimes equated with communism, and some states use the terms communism and socialism almost interchangeably – For example, the former Soviet Union was actually called the Union of Soviet Socialist Republics – For example, some Western European countries (such as Sweden) are often labeled as democratic socialist states, but there were substantial differences between the Soviet Union and Sweden 17 Communism versus Socialism Communism Socialism • The state (on